Sonoco Products Co (SON) 2021 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q1 2021 Sonoco Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Roger Schrum. Please go ahead.

Thank you, Angela, and good morning, everyone, and welcome to Sonoco's First Quarter 2021 Investor Conference Call. Joining me today are Howard Coker, President and Chief Executive Officer; Rodger Fuller, Executive Vice President; and Julie Albrecht, Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at sonoco.com. In addition, we will reference a presentation on our first quarter financial results, which also posted on our website this morning.

Before we go further, let me remind you that today's call and presentation contains a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially.

Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operation. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely related GAAP measure, is also available in the Investor Relations section of our website.

Now with that, let me turn it over to Julie.

Thanks, Roger. I'll begin on Slide 3, where you see that earlier this morning, we reported first quarter earnings per share on a GAAP basis of $0.71 and base earnings of $0.90 per share, which was at the top end of our guidance range of $0.80 to $0.90 per share. At a high level, our first quarter results reflect solid top and bottom line results despite various unexpected headwinds from severe weather in the U.S. and global supply chain disruptions.

In terms of the $0.19 difference between base and GAAP earnings per share, $0.05 related to restructuring and asset impairments, $0.05 was from nonoperating pension costs, $0.03 reflects the loss on our Display and Packaging U.S. divestiture and $0.06 primarily is related to acquisition and divestiture transaction costs.

Moving to our base income statement on Slide 4 and starting with the top line. You see that sales were $1.353 billion, up $50 million from the prior year period. I'll review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $278 million, $11 million above the prior year's quarter. This performance resulted in a solid 20.5% gross profit as a percent of sales, which was equivalent to the first quarter of last year. SG&A expenses, net of other income, were $138 million, an increase of $15 million year-over-year. This increase was expected and key drivers were higher expenses for normalized management incentives, strategic IT spend as well as property insurance premiums. All thus, resulting in first quarter 2021 operating profit of $140 million. I'll discuss the key drivers on the operating profit bridge in a few minutes.

Net interest expense of $18 million was $2 million higher than last year due to higher debt balances than in the first quarter of 2020. As a reminder, this relates to our conservative liquidity actions in the uncertain COVID-19 environment. Income tax expense of $31 million was $2 million below last year due to both our lower pretax profits and slightly lower effective tax rate. Our current quarter's base effective tax rate was 25.7%.

Moving down to net income. Our first quarter 2021 base earnings were $92 million compared to $95 million last year.

On Slide 5, you see our new operating and reporting structure that is more simplified and better reflects how we are managing our businesses going forward. With this change, we are reporting our results in 2 segments: Consumer Packaging and Industrial Paper Packaging. Our remaining businesses are presented in an All Other group. Our previous Protective Solutions and Display and Packaging segments have been eliminated and their businesses moved into this new structure.

Changes to the Consumer Packaging segment include moving our TEQ, health care packaging and industrial plastics business -- businesses into All Other. Industrial Paper Packaging is relatively unchanged, except that our fiber protective packaging unit has been added from the former Protective Solutions segment. All Other includes our health care and protective packaging businesses, including TEQ, ThermoSafe, our consumer and automotive molded foam business as well as our alloyed retail security packaging unit.

Now looking at the sales bridge on Slide 6. You see volume mix was higher by $46 million or 3.5% for the company as a whole. This increase reflects solid demand and 2 additional shipping days in this quarter versus last year. I will add that the severe U.S. weather event in February of this year had a negative impact on our top line of around $9 million. Our Consumer Packaging segment volume was up $24 million or 4.5%. We continued to have impressive growth in Global Rigid Paper Containers, which saw volumes increase by 8%. Plastic food volumes were up almost 3%, while our flexibles volumes were essentially flat.

In our Industrial Paper Products segment, volume mix was up $13 million, or 2.6%, driven by strong recoveries in our protective fiber and our global tubes, cores and cones businesses. Finally, our All Other group saw an increase of $9 million or 3.3%. This was driven by stronger volume across our industrial plastics business as well as our medical plastics and ThermoSafe businesses.

Moving to price. You see that selling prices were higher year-over-year by $48 million. This was primarily in our Industrial segment as we worked to recover escalating OCC costs around the globe.

Moving to acquisitions and divestitures. You see a top line reduction of $60 million, which is mostly driven by the Display and Packaging Europe divestiture, but partially offset by the addition of Can Packaging in August of 2020. And finally, the sales impact from foreign exchange and other was positive by $16 million. The primary driver was foreign exchange translation associated with a weaker U.S. dollar year-over-year.

So moving to the operating profit bridge and starting with volume mix. Our higher sales volume, combined with favorable sales mix, had a strong lift on operating profit of $20 million. This favorable impact was spread among the segments, but with a more pronounced impact in Industrial due to improved sales mix across our global paper mills.

Shifting to price/cost. I will remind you that this category includes the earnings benefit from higher selling prices as well as the impact of total inflation. In our first quarter, we had $28 million of unfavorable price/cost. Our Industrial segment was hit the hardest with price/cost challenges, due to the higher OCC costs internationally as well as higher-than-expected inflation and operating costs like energy and freight. As usual, there is a slide in the appendix that shows recent OCC price trends, and you'll see that Southeast OCC official board market pricing was at $85 per ton in January and February this year, until market pressures caused a jump to $90 in March. This resulted in an average of $87 per ton in the first quarter, a $45 increase over the first quarter of last year. We do anticipate continued headwinds in OCC cost escalation this year, and this is evidenced in April when the market moved to $95 per ton.

Next is the impact of productivity, which includes all results from our productivity actions, including manufacturing, procurement and fixed costs. You see that our total productivity was a solid $22 million year-over-year with a favorable impact across all 3 segments. Our productivity actions remain an important focus area across our business as we work to overcome inflation and ultimately drive higher margins.

Moving to acquisitions and divestitures. The $3 million decrease in operating profit is the net impact from the Display and Packaging Europe divestiture and the Can Packaging acquisition. Finally, the operating profit change in foreign exchange and other was unfavorable by $15 million with various moving pieces, mostly within SG&A expense.

Moving to Slide 8. You'll find our segment analysis where you see that Consumer Packaging sales were up almost 8%, driven by the addition of Can Packaging and higher volumes driven by COVID, eat-at-home behaviors and the 2 additional shipping days in the period. Consumer segment operating profits increased by almost 19%, driven by strong volume mix and productivity results. Our Consumer segment margins increased by 120 basis points to a very strong 13%.

Our Industrial segment sales grew by 12.5% due to year-over-year price increases as well as recovering demand and the increased days in the period. However, Industrial's operating profit declined by almost 16% due to much weaker price cost dynamics compared to the prior year. These headwinds were somewhat offset by improvements in productivity and volume mix. Our Industrial segment's operating profit was 8.9%, down by 300 basis points when compared to the first quarter of last year. And finally, All Other sales declined by 21%, primarily driven by the sale of Display and Packaging Europe. Operating profit decreased by 32.5% due to the divestiture as well as price/cost headwinds. For this All Other group, operating profit margins declined to 6.8%, 110 basis points lower than the prior year period. So for the total company, sales increased almost 4%, but operating margin declined slightly to 10.3%.

Moving to cash flow on Slide 9. Our first quarter 2021 operating cash flow was a very solid $139 million, an increase of $51 million over last year. This increase was primarily driven by a reduced consumption of working capital in this year's first quarter compared to the same period of last year. Our global team's focus on disciplined working capital management continues to show in our strong cash flow results.

Looking at CapEx in the first quarter. Our net spend was $39 million this year compared to $31 million in the first quarter of 2020. We do expect our CapEx spend to ramp up over the balance of this year as we make progress on Project Horizon and other important projects. Howard will be providing additional comments on this activity in a few minutes.

This takes us to our free cash flow generation of $99 million for the first quarter of this year compared to $57 million last year. And finally, we paid cash dividends of $45 million in the first quarter of 2021 compared to $43 million in last year's first quarter.

On Slide 10, you see that our balance sheet and our liquidity position remain extremely strong. Our first quarter 2021 ending consolidated cash balance of $588 million, includes approximately $340 million of cash held in short-term investments that are very liquid and of high credit quality. I will add that while we recognize the Display and Packaging U.S. divestiture in the first quarter, we received the cash proceeds on the first day of our fiscal second quarter.

Our consolidated debt totaled $1.7 billion at the end of the first quarter of 2021, essentially flat from year-end. As we move through this year, we expect to reduce these cash balances and rebalance our debt portfolio to our historical splits between floating and fixed rate debt. We expect to take actions focused on putting our cash balances to work, while delivering shareholder value and continuing to position ourselves for further growth.

So moving to Slide 11. You see that our guidance range for second quarter base EPS is $0.82 to $0.88 per share. As Howard will discuss in more detail, this outlook reflects solid demand trends but also continued intense inflation headwinds as well as the divestiture of Display and Packaging U.S.

Shifting to our updated full year 2021 base earnings per share guidance, we are narrowing our guidance to the upper half of our original full year guidance range. Our new guidance is $3.50 to $3.60 as we have increased confidence in the macroeconomic and -- environment and the related impact on our business, especially as we look into the second half of this year. This outlook does include the impact of the Display and Packaging U.S. divestiture which removes around $0.09 of base EPS for the last 3 quarters of this year. I'll also note that our cash flow guidance is unchanged for the full year. Our guidance range for operating cash flow remains at $570 million to $600 million, and our outlook for full year free cash flow is still $270 million to $300 million. This outlook does exclude the approximately $150 million pension contributions that we expect to make later in the second quarter related to our pension termination process.

So this concludes my review of our first quarter results and our outlook for the second quarter and full year of this year. So I'll turn it over to Howard.

Thanks, Julie, and good morning, everyone. Let me provide some additional color regarding our first quarter performance, and then I'll talk about what we see entering the second quarter.

Let me start by saying how proud I am of how our team came together to work through the challenges stemming from severe winter weather and global supply chain disruptions to meet the needs of our customers while delivering a better-than-expected start to 2021. Our operations were impacted by winter storm Uri in February with more than 40 of our U.S. plants being temporarily shut down due to a lack of natural gas or electricity. Most of the shutdowns were only for a few days, and we were able to meet the needs of our customers. However, the storm aggravated already tight supply chains, which is further impacting the availability and prices for resins, chemicals, adhesives and freight. Despite these headwinds, our Consumer Packaging segment had a strong result, producing the second best operating profit ever as many of our products continue to benefit from consumers' at-home eating habits.

As an example, our Global Rigid Paper Container business registered an 8% improvement in volume mix, with North America up 6%; Europe up 9%; and Asia up nearly 30%. Our customers are telling us they are seeing young consumers rediscovering staple foods as an experiment with cooking at home. For example, we have seen a resurgence in products such as refrigerated dough, which is up 27% this quarter in North America and equally as strong in Europe. Our customers are also telling us that the adoption of remote work is providing a structural change in demand for convenient, frozen and prepared meals. This trend is helping our recyclable plastic food tray business, which has been -- has seen double-digit growth for the past several quarters. And as I believe, we'll start seeing some COVID-impacted categories start to improve as markets continue to reopen. Categories such as confection, foodservice and some medical products are showing signs of growth, and we expect this to continue as the year goes on.

Switching to our Industrial business. We are clearly seeing global industrial markets reopen which helped our Industrial Paper segment report sequential improvement in results for the third consecutive quarter, although operating profits remain down year-over-year. In the first quarter, Industrial segment sales grew 12.5% due primarily to volume growth and higher selling prices implemented to offset higher raw material costs and nonmaterial inflation. Global tube, core and cone volume mix improved 3% as North America volumes were down about 1%, which was more than offset by strong improvements in Europe, Brazil and Asia. Unfortunately, our Industrial business continues to be negatively impacted by price/cost due to rising recovered paper, chemicals, adhesives and freight.

We have mobilized our inflation recovery plans with targeted pricing actions already in the market. Others communicated to our customers and some yet to come. Year-over-year, RISI's tan bending chip index has moved up 11% to $780 a ton, and medium prices have moved nearly 20% to $735 per ton. Demand for URB and medium remains strong and backlogs in North America are at the highest levels in recent history. As a result, we fully believe additional increases that have been announced will be reflected later in the second quarter.

After a slow start due to the pandemic, we're still making solid progress on Project Horizon and still expect the conversion of our #10 paper machine to URB to be completed in the second quarter of 2022. As we previously mentioned, we're investing approximately $300 million in capital this year into our Consumer and Industrial businesses.

In addition to Project Horizon, we've identified a number of excellent projects that we expect to provide solid growth and margin improvement with returns well above our cost of capital. For instance, we're building a new thermoforming line in our Waynesville, North Carolina plastic food tray plant to meet the increased demand I spoke to earlier for retail and institutional frozen meals. We're expanding our proprietary Sonopost appliance packaging technology into Europe with the opening of a new manufacturing facility in Poland. This new facility will open this summer to service new customers with a 100% recycled paper-based protective packaging. I'll mention that we saw a 29% increase in Sonopost appliance packaging volumes in North America in the first quarter alone.

In addition, we are funding the launch of 2 new products in our ThermoSafe temperature assured packaging business, including our new Pegasus ULD system, which offers a first-of-its-kind passive temperature assurance unit load device that can provide a cost-effective alternative for shipping sensitive pharmaceuticals via aircraft around the world.

Finally, we're funding a number of automation and technology projects to boost productivity in our operations. Earlier this year, we announced we will be partnering with ISI, an advanced manufacturing, automation and robotics company, to help us advance use of automation throughout our global operations. In addition, we're funding capital projects across multiple businesses that will speed production, lower operating costs and reduce the need for product handling labor, which is proving to be extremely difficult to recruit and retain in the current work environment.

After capital spending, returning cash to our shareholders remains a top priority. For 96 consecutive years, we have paid cash dividends to shareholders. And we have increased our dividend for 38 straight years, and our payout provides just under a 3% yield, nearly twice the S&P index payout. In addition to approving our regular quarterly dividend yesterday, our Board has approved a new share repurchase authorization of up to $350 million. This new authorization further demonstrates our financial strength and illustrates our focus on a balanced capital allocation strategy. Finally, we'll continue to improve our portfolio by selectively acquiring and divesting businesses to strengthen our core consumer and industrial base. Our strong balance sheet and robust cash flow provides us the flexibility to evaluate and pursue most internal and external opportunities. However, we do remain committed to maintaining our investment-grade credit rating.

Let me wrap up with a few remarks regarding our second quarter and full year outlook. While we are cautious near term about inflationary risks, we are becoming more confident in our ability to benefit from the developing post-pandemic economic recovery, particularly in the second half of the year. As I mentioned, we expect to see continued inflation in recycled fiber, resins, chemicals, adhesives, freight and other operational costs. We have a number of operational and commercial levers that we can pull to offset this pressure, of course, including price.

We also expect demand in most of our Consumer and Industrial businesses to remain solid for the foreseeable future. The pandemic has provided a period of significant elevated consumer demand, and we believe consumers will largely maintain the habits they've acquired over the past year. With 80% of our consumer portfolio focused on fresh, frozen and processed foods, we believe we are uniquely positioned to continue benefiting from consumer at-home eating needs. Demand for uncoated recycled paperboard remains strong globally, and our tube, core and cone products are also seeing a resurgence in demand, frankly, to near pre-COVID-19 levels in most of our served markets.

Finally, I'd be remiss if I did not mention our sustainability efforts, particularly since today is the 51st anniversary of Earth Day, and we have quite a number of activities planned. Recently, we hired a senior leader of sustainability reporting directly to me to work more closely with our customers to identify opportunities to meet their challenging product requirements. With that in mind, we continue to expand our EnviroSense line of sustainable packaging that incorporates increased recycled content and an improved recyclability. EnviroSense is represented across our portfolio from rigid plastics to flexibles to our iconic paper containers. In fact, we recently began working with a customer in Europe to transition their product to one of our EnviroCan paper containers from a less sustainable substrate. We do expect this trend to continue.

Now with that, operator, would you please review the question-and-answer procedures.

(Operator Instructions) Our first question is from the line of Gabe Hajde with Wells Fargo.

Congrats on a solid start to the year. I was curious, maybe, Howard, if you can talk a little bit about the Consumer segment. And I think one of the questions or a lot of interest that we're getting is folks are somewhat fixated on week-to-week Nielsen data that is obviously negative because we're comping some pantry stocking. But to the extent you have any visibility, can you comment at all about inventory levels either within your operations? Or again, kind of what you detect on your customer side and, I guess, the potential for any kind of choppiness over the course of the year?

Thanks, Gabe. I'd say inventories are tight right now, particularly if you think in context of the impact of the winter storm. We, as well as our customers in terms of their feedstocks, have had to go through various different channels just to ensure that we're able to maintain the flow of goods and products. So our inventories are low right now. And what we're hearing from our customers is very similar. So really aren't seeing a big concern there.

The other, I would just note that we've talked about in the past as it relates to the products that we actually serve on the consumer side, they're relatively quickly consumed. So we're just not seeing any of what you're referencing here as it relates to inventory in the system on our side, our customers' side and their customers' side from that standpoint, and that's my comment about the turnover of our products in the pantries.

All right. And then, I guess, Julie, the one thing that stood out for me on the operating profit bridge, and I think you called it out mostly was maybe some management incentive comp. But that $15 million or so, is that expected to kind of continue over the course of the year? Or can you give us any look into how that might play out?

Yes, sure. Yes, we actually -- I would say that type of variance or bridge item probably will continue, as we've mentioned in our full year guidance. We absolutely plan for higher IT strategic spend. We knew property insurance premiums were going up. And as well, as long as 2021 played out like we expected, we would be back to accruing incentives at target versus -- or appropriately depending on our outlook for the business, versus what we were doing last year, where, obviously, there was weakness very specific to COVID. So yes, I think I mentioned that our SG&A results, while higher year-over-year in the first quarter, were pretty much as expected. And so I'd expect that to continue generally through the year.

Your next question is from the line of George Staphos with Bank of America.

My line drops, I apologize if you already answered this question. Howard, congratulations on the performance in Consumer. When you were talking about where you're adding capital this year, you enumerated a number of projects. One area you didn't really mention was composite cans. Even though the paper can business seems like it's having a great year, why are you spending or why are you not spending behind the growth that you're seeing in composite cans? And if you are spending, where are you putting it in terms of the growth outlook there?

Yes. Thanks, George. Yes, the intent and what the list I went through was just to kind of give you a snapshot across the portfolio. We absolutely are engaged in capital expenditures on the can side of the business. From a project perspective, we've got a -- it looks like a second line that we're going to be putting into Brazil for growth that we're seeing there. Can packaging is just absolutely starting to, I hate to use the word explode, but it seems like -- in fact, I got a -- I actually went -- not that I wasn't listening to Julie, but I was checking my e-mails while she was speaking and just got a note that we picked up even another series of customers related to that technology.

And so we are extremely bullish in putting a lot of dollars deservedly, particularly on an international perspective. And then finally, I didn't spend a lot of time talking about automation, but that's across the portfolio. It's something that drives the return in and of itself, but it also addresses what I think we have a problem just across the country in terms of labor availability. But no, we're very focused and are excited about the opportunities that we have going forward on the can side of the business.

I appreciate that, Howard. Again, even listening to this, and it sounds like, again, you have very impressive growth and some great returns so far with Can Packaging. You didn't really say much about North America even though, again, we're seeing volumes that, frankly, we haven't seen in the whatever 25 years that we've covered your company. So are you -- is that -- does that suggest that you're not as optimistic about the composite side in North America, even though you're saying consumers are rediscovering packaged foods again? Or are you being modest and there is an investment in growth there that you expect will be sustained? How would you answer that question?

Yes. So absolutely, we're still very bullish on North America. And yes, we've seen good growth really for the last multiple quarters in North America. But to say what I've already said, what's surprising to us is to see some categories that are highly seasonal that have just lifted. So yes, we're very bullish. As we talk about Can Packaging, yes, I speak to it in terms of Europe, but we're looking that as a global play. It's a new acquisition that was -- we had hoped to start deploying the technologies on a pretty rapid basis around the world and COVID came around. Here we are, we're starting to make progress in Europe. We've got projects identified elsewhere globally.

And it also relates to the automation partnership that we just engaged in with the company ISI that I noted, with -- one of the major intents is to help us further leverage here in North America and around the world the technologies that we've acquired through the Can Packaging acquisition. So again, very, very pleased with the performance and the look forward across all markets that we serve with our can business.

Last one, and I'll turn it over. Just a quick one. Rigid plastic, you noted growth, but it seems like, and just remembering from the press release, fresh food was a bit of a weak patch for you there. I'm assuming that's just related to COVID and shoppers still not being out necessarily and shipping -- shopping in the perimeter of the store. But if I remember correctly, what is -- what was driving that relative weakness? And is any of it related to kind of the ongoing issues you've had in that business over time? And I'll turn it over.

Sure. Thanks, George. Thank you, again. From a perimeter perspective, it's somewhat seasonal as it relates to the berry harvest. But Rodger, do you have...

Yes, George, Rodger. The only other comment, some of that volume weakness you're seeing is from our consolidation efforts that we took on the West Coast last year. And the good news is the EBIT impact is where we expected to be, but we did give up some volume in that consolidation.

Your next question is from the line of Adam Josephson with KeyBanc.

Julie, one question on the guidance. So you lost $0.09 from the sale of U.S. Display. You nonetheless raised your full year range by $0.05 at the midpoint, so $0.14 underlying increase. I assume that's all volume-related. Is there any other moving parts there? Are your inflation expectations higher than they were 3 months ago? Can you just talk about whatever moving parts there were in that $0.05 uplift?

Yes, sure. I mean, really -- and you're right about noting the fact that we did have Display and Packaging U.S. in our original full year guidance. And so very specifically, that $0.09 is coming out of the balance of the year. But absolutely, I mean, the increase there in the guidance is really just second half. We are pretty optimistic about volumes continuing to increase as we move through the year as well as, as we move through what we think is going to be a challenging Q2 from a price/cost perspective, we think we'll then be well positioned. We're expecting and hoping that inflation pressures, let's say, moderate into the third and fourth quarter. And then we will be, again, just better positioned from a price/cost perspective. So really, again, a lot of it relates to our bullish outlook for the second half of the year. I don't know if Rodger wants to add any more color there. Or we're good? Okay?

Nothing, you said it well.

Wonderful. And Julie, speaking of raw materials, I think you and Howard talked about your expectation that OCC will continue to go up beyond what it went up in April to $95 in the Southeast. What exactly are your expectations there as well as on resin and chemicals? And just back to OCC, obviously, there were significant production disruptions in February and really throughout the first quarter, and there's significant maintenance happening in the Southeast, specifically. So one would think that OCC wouldn't be going up by too much, but obviously, it is. So can you just talk about what exactly you're experiencing? And how much more you expect it to go up and why? And then also in Europe, I think OCC is at an all-time high. Just any thoughts there as to when that -- you would expect that to moderate?

Yes, Adam, this is Rodger. I'll start, and Howard and Julie can add in. But as we look at the second quarter, and some of this is pretty recent, but we're expecting OCC throughout the quarter to get up into the 120s at this point. That's more than probably it was expected 30 days ago. But you know, everyone knows the strength of the containerboard market, that continues. We're seeing very strong bids for any new open opportunities that come forward for future contracts for OCC. We're starting to see some more availability of containers, still pretty tight, but they're coming available. So you'll start to see more exports. So all of that, in our opinion, is going to drive OCC up a little bit from what was expected probably 30 days ago. So the answer to your question, up into the 120s by the end of the second quarter.

To hit the price side of that, you've seen the move in RISI last week on both medium and URB. So we fully expect we can offset that, but we do expect the additional OCC headwinds. On resin, you've seen the impact in the first quarter, tremendous. We expect most resins will peak in the second quarter. About -- if you look at the basket of Sonoco resins, about half of what we buy is PET. We see that peaking this month. Polypropylene probably peaked at the end of the second quarter. The rest of the basket, all the other resins, will peak sometime in the second quarter. So as Julie said, we expect second quarter to be our toughest quarter from a price/cost standpoint in our resin-based businesses. And finally, Europe, we are starting to see those record OCC prices start to peak out in Italy and Spain. So as you said, they are at record levels, but we expect those to sort of moderate. And we're in the midst of our third or fourth price increase announcement in Europe to recover that inflation as well.

And just last one for me. Can you talk about freight and labor? I don't -- I forgot if you mentioned it earlier on the call, but are you expecting those pressures to moderate? I assume that you're not expecting the labor pressures to moderate given the enhanced unemployment benefits. But any thoughts, freight and labor, how consequential that has been for you, what your expectations are, et cetera?

Yes. You said it on labor, Adam, very difficult. We are struggling to hire the people we need in many of our operations that we -- that goes back to Howard's comments on automation. We've got 4 or 5 really strong projects in our Tier 1 plants to help us with headcount, not to remove jobs of people we have today, but to operate our lines and supply products to our customers. So labor will continue to be a challenge. We don't see that moderating at all this year.

Freight, very -- again, another difficult quarter in the first quarter. We -- I think we projected a 10% increase in freight for the year. We saw -- probably saw more than that in the first quarter that we're seeing some moderation. So I'd say that's still a good number for the year. It tightens from time to time, but that level of inflation is probably still a pretty good number to use in your evaluation.

Your next question is from the line of Josh Spector with UBS.

Just curious on the industrial volumes side of things. Understanding the first quarter impact from storms in the U.S., just curious what utilization and what output could do from a volume perspective sequentially into the second quarter? I don't know if you could provide any characterization of how you're thinking about that.

Yes. This is Rodger. As we look at the second quarter, we're seeing a sequential 1% to 2% improvement in volumes from the first quarter. Obviously, year-over-year, a very strong improvement because we were in the midst of the beginning of the pandemic. But if you look at achieving core in that 1% to 1.5% range, URB will get -- we will get recovery from the storm. So probably in the 3% to 4% range. So sequentially, again, I think that 2% quarter-over-quarter volume improvement is a good number to use.

That's helpful. And just within the Consumer Paper Packaging side to kind of come back to that. I don't know if there's a way that you can frame the typical churn that you see in that business or like a win-loss ratio. And just curious if things are any different now versus 2 years ago. So if some of the consumption trends normalize, would you expect sales to be higher or lower versus that time frame?

Yes. Josh, this is Howard. I'd say right now, things are fairly stable, it's -- here in North America, as I noted earlier. We are seeing volume pickups in Europe and Asia, Europe actually substantially. So -- and that seems to be related to not only the Can Packaging acquisition, but the overall sustainability footprint of the package. And Asia is just continuation. It's been double digits for multiple, multiple quarters. And as we noted earlier, 30% in this quarter. So if there's a win-loss, I'd say it's probably -- we don't really track it that way, particularly on a global base, but I'd say it's -- we're on the winning side at this point in time.

Your next question is from the line of Mark Wilde with Bank of Montreal.

Just to start off, Howard or Julie. I wondered if you could talk about that share repurchase authorization, some thoughts on cadencing. And historically, you've used repurchases just to offset options dilution. Is there any shift in kind of strategy in terms of how you're thinking about share repurchase, maybe as a part of your overall capital deployment strategy?

Yes, Mark, I'll start on that, Howard can add some comments there. I think our view on share repurchase really as usual is that we have as a tool, right, as a part of our overall capital allocation strategy and how we return cash and value to shareholders. So we did refresh. The Board refreshed the authorization this week to shift from number of shares to a dollar amount, which we do think kind of better signifies, again, this kind of return of value to shareholders. Although, quite frankly, we do keep our eye on dilution, but it's not the sole driver for how we would now look at share repurchase. So I think the bottom line is we're just, as usual, and extremely, right now, very well positioned with our balance sheet, the cash, our leverage to have share repurchase on the table as a way that we, again, continue returning value to shareholders.

Well said.

Okay. And then -- Howard, did you have any thoughts? Or does that kind of covers on that?

No. Julie summed it up nicely. Thank you.

Okay. And then I'm just curious, in terms of the new divisional segmentation, for a time, you've been kind of breaking out protective and temperature assured. And I'm just wondering whether we should read anything into this new segmentation in terms of your strategy for which businesses you're going to grow or not grow?

Yes. Thanks, Mark. No, really, it was triggered with -- because we had the Display and Packaging segment that once we divested Europe, we recognized. And as you know, today, we've sold the U.S. side. We knew that sector was -- or segment was going to dissolve. And so we took a different approach in terms of how we are going to structure ourselves. And that's how we've landed at this point with what you see today. So it was driven by the divestitures frankly.

Okay. And last one for me, Howard. Is it possible to just get a few thoughts about how you're thinking about acquisitions at the moment, which areas you're focusing on and whether you've shifted focus at all over the last 12 to 18 months as you've settled into the CEO seat?

Yes. Mark, I'd say no, really in a -- of course, there's evolution over time. We've talked about the strategic planning review process that this team has been through over the last year or so. And our focus really is on what we've -- what I've stated from the very beginning, is that we're going to focus on markets segments that we feel like we have a right to participate in, that we have core competencies around. And that does get across the breadth of our portfolio, some stronger than others but still active, engaged. And we'll let you know as the next one comes through. But it's all around where we've got a right to be in that particular business, be it a bolt-on or otherwise.

Your next question is from the line of Ghansham Panjabi with Baird.

Howard, as you kind of think about previous economic cycles and how your Industrial segment has recovered, is there anything that you think could be different with the current recovery cycle than maybe what you've seen in the past from a macro perspective? And also how is the segment specifically positioned differently, if at all, this time around?

Thanks to the field effort coming out of last year's recession, if you want to call it that. The growth around the world is looking very positive. From a structural perspective, we think that the markets here in North America are in good shape and orderly, if I can say that. As we go, as you say, around the world, down in South America, we've done a lot of work, not only there, but Europe and the U.S. in terms of rationalizing our operations, rightsizing the business, positioning ourselves for declines when we see those, but certainly being able to take the opportunity when we see situations like we're seeing right now, where it feels like things are really starting to heat up.

So barring the inflation that we're facing right now, that I think we should see us driving through in the second quarter, we feel like we're structurally in a very, very sound position to come out stronger than possibly we had in previous recoveries over history.

Okay. And then on the Consumer Packaging volumes, I mean, just stripping out the 2 extra selling days -- or shipping days. The growth in rigids, was there any pull-forward associated with that? And then also, I'm trying to get a sense, maybe, Julie, the margin increase in that segment year-over-year. Was that a function of mix? Or was there anything else that kind of boosted the margins in the context of, obviously, higher inflationary costs, et cetera?

Yes, Ghansham, I'd say on the pull-forward, no, I would not classify that that's what's going on right now at all. So we're seeing pretty stable but much higher demand on a global basis.

And to your second question about the margin improvement, we did have some positive mix absolutely in the -- from a -- in that sales volume perspective really across that portfolio, not in every business, but in the larger businesses in consumer, very nice mix. As well, just good productivity, right? When you think about the higher volumes, we're able to leverage our fixed costs very effectively. That obviously helps margins as well. And there was some pricing increase, too. So it's really kind of across the board, but I would definitely attribute a lot of the margin improvement to very nice sales mix as well as the strong volumes just helping drop-through better productivity to the bottom line.

So Julie, just to clarify, so for Q2, which is seasonally, I think, stronger than 1Q for that segment, so 13% operating margins in the first quarter, do you think margins will be at that level, higher or lower for the second quarter?

Our outlook right now, because of the price/cost challenges that we've mentioned several times on this call, we don't expect the consumer margins to be quite at the 13%. So maybe 100 basis points or so below that. But -- so again, we expect volumes to remain solid sequentially in the segment. But again, a bit of concern over like Rodger was mentioning resins and how we're able to pass-through those costs, the timing of that, especially, we expect that to be a slight headwind Q1 to Q2 for consumer.

Your next question is from the line of Kyle White with Deutsche Bank.

I actually wanted to ask about resin and follow-up on that. Is there a way to put a finer point on the impact of the lag in the pass-through of resin that was -- that occurred this quarter? And then also what you're expecting for next quarter in terms of the dollar amount?

Yes. This is Rodger. Everybody is pointing at me, so I'll answer. I can't really give you a specific dollar amount. I think if you look at the impact, Julie has mentioned the impact in Consumer. The other impact will be in the All Other category with the removal of the U.S. Display and business -- Display and Packaging business, that segment will be a 100% resin-based. So we are expecting some margin pressure in that segment as well. But I went through kind of where we saw the resins peaking. So again, I think the second quarter is our toughest quarter. But at this point, I can't put a specific dollar amount for you.

That's fair. Just shifting gears to temperature-assured packaging in regards to the vaccine rollout. How is it going relative to your expectations? And does the current pause in one of the major vaccines has a major impact on you relative to the other vaccines out there?

Yes, this is Rodger. It's going okay. If you think about, again, going back in a little bit of history, we supply about half of the packaging for the normal flu vaccine every year to a tune of USD 20 million in sales or so. Over time, we expect the COVID vaccine to get into that normal level of routine and sales for us. Our closest relationships, frankly, are with J&J and AstraZeneca, you just mentioned one of the headwinds there.

So yes, we've gotten off to a slow start. We did have impact in the first quarter with those -- some support areas for vaccines. We expect that to ramp up throughout the year as these vaccines get full approval by the FDA. They're being distributed by the government today, primarily in larger packages. As it gets more into the retail environment and these last mile smaller packages, we expect the impact for Sonoco to improve at that point. So I would think it's a lot like the flu vaccine going forward for us in the second half of this year and into 2022.

Your next question is from the line of Salvator Tiano with Seaport Global.

Firstly, a couple of questions on some items that are in your updated guidance. So if I understood correctly, with the U.S. Display and Packaging sales, that was $0.09 for just 3 quarters now. So we're talking about roughly a $0.15 raise in the full year number. So firstly, with regard to just to the U.S. URB pricing, is it correct to assume based on what you said before that you're now incorporating even the third price hike that you announced in March in the guidance? And secondly, I wanted to ask about productivity here also because I think your initial bridge from last quarter showed around $50 million, $55 million productivity improvements for the year, but you already delivered $22 million in a single quarter. So is that something that also is coming above what you expected earlier?

Yes. Maybe I'll start with the productivity question, and Howard and Rodger can clarify a little more on the pricing increases because there's so much activity there. You can have an extremely dynamic environment with price and cost changes. You're right. We've started out the year, the $22 million operating profit delivered from productivity is a really, really solid start to what we were expecting for this year and what's in our guidance. I'd say, embedded in our guidance is probably a slight increase in what we expected before.

But I would say, at the same time, nothing really dramatic there. When I looked at it, we delivered about 1/3 of our gross productivity in the first quarter of our full year expectations. So a little ahead of what we expected, but not dramatic. So -- but it's possible that we could land the year, and I would hope we would land the year above our expectations. But I would say in the guidance, nothing really material related to productivity above expectations, but maybe slightly.

And Sal, briefly on the URB, no, our last increase is not -- was not baked into guidance. It's effective, I think, April 26 or so. And you really should not be surprised if you see further increases as we progress through the quarter.

Just to clarify, when you said further increase, you mean in URB price or in the guidance?

All, as talked before. But certainly, URB, with what we're seeing with -- as we've already talked about, we're seeing everything we buy is inflating. And that's...

Okay. And just -- sorry, go ahead.

No. You go ahead.

Just one last question on Industrial Paper Packaging. Can you break down essentially how the legacy business, tubes, cores, et cetera, it would have performed in terms of operating profitability if you didn't have the fiber protective business that I think has been doing very well in the past few quarters?

No, we really don't look at it that way. Again, we're happy with how both businesses performed and both are being impacted equally as it relates to the URB and OCC-type increases that we're seeing.

Yes, Sal, this is Roger Schrum. And I'll just remind you that, that's an integrated product, so it uses paper that's produced in our paper division. And then it's converted into the product, the posts that we sell. So it obviously makes sense to be in that particular segment, but there was already profitability for the paper that was being sold into that segment anyway. So it's -- again, it's not a material number to talk about.

And honestly, that's a really nice business, but it's really not that material, quite frankly, when you look at the entire Industrial Paper segment that we have. So it wouldn't be a big needle mover anyway.

Your next question is from the line of George Staphos with Bank of America.

Follow-on, will be quick. So can you update us on Project Horizon both in terms of where you stand relative to your prior guidepost? It sounds like you maybe are off to a little bit of slow start with the storms. So where do you stand in terms of starting the stock prep area? And related, what projects beyond this Project Horizon might you have down the pipe? Maybe you can share a little bit of color on in terms of your ability to use mixed waste and other types of furnish relative to OCC.

Second question is just one more on composite cans. I think at one point in time, you'd expected volume to be down for the year modestly because of the comparison, the very strong comp from 2020 that you had. Is that still the case? Could you give us a number for the year?

And then last question, back maybe to Adam's question on guidance. So I think looking out this year, if we were -- this was 2 quarters ago, the ballpark was somewhere around $3.40-ish when we did the math on the divestitures and dilution. And you've done a good job, obviously, performing and raising the guidance. When you think about that variance from the $3.40 to $3.50 to $3.60, is it mostly mix? Is it mostly pricing? Is it volumes of productivity, if you could just stack rank them?

Great. Thanks, George. On Horizon, things are going extremely well. We are delayed by a quarter, and that really relates to the actual machine conversion. Just to remind, the project was a couple of things. One was, of course, to take the medium machine and convert it to the largest URB machine in North America. But the other portion was logistics and flow around the campus. And if you come down here now, you'd be amazed at the amount of activity going on.

So we expect stock -- you mentioned stock prep specifically. I think that's expected to be up probably late October-ish, sometime late third quarter, early fourth quarter. That particular system will be set up to -- with the cleaning equipment to manage mixed waste. Not sure on what -- exactly what you meant on what other projects that we maybe see coming into the future. But kind of what I was talking through with -- in my prepared comments that we've got, do we have a $100 million Project Horizon that's visible at this point in time. But the answer to that is what we do. But we're working on that. That may be some time to come before we actually pull the trigger on that, but we've got just a multitude of projects that were represented through the examples I gave in my commentary.

I'll just finish on Horizon by just saying that, yes, things are holding as we had expected with that one quarter delay. And to add to that, the medium market is good right now. So it does not impact the financial expectations that we have built into the models the way the machine is performing right now. On cans, I would just ask Julie if she would give a couple of comments and move on to the...

Guidance, yes. Yes, George, you're right. Our volume expectations for the global paper containers business were originally to be down, kind of that 2% to 3% range. And I think we are more bullish on that business now for the full year. We had the great start. And again, we are optimistic about, again, these eat-at-home and different types of at-home cooking trends are going to remain more in place than maybe we did when we started the year. So is the rigid paper container business flat year-over-year versus down 2% to 3%, I think that would probably be our outlook at this point.

And to your -- if I captured your question on the guidance, I think most of this, again, improvement that -- and the tightening, the slight raise of that midpoint really is volume mix-driven with some small contribution from productivity, like I was mentioning a few minutes ago. But I'd probably put it 2/3 in volume mix and 1/3 in productivity just at a high level.

Your next question is from the line of Adam Josephson with KeyBanc.

Howard, just one strategic question. So you have Project Horizon, you're talking about these other projects. It seems as though the company is investing more in itself than perhaps it has in years past. And at the same time, you're pruning the portfolio by selling Display, just to simplify the business mix, all of which suggests that you're focusing really on growing earnings internally rather than relying on M&A to do so. But at the same time, obviously, Bloomberg mentioned that you were in the running for the Crown business. So can you just talk about how you're thinking about growing the company in the years to come? How much just from internal investments, how much from M&A, what your preferences are to the extent you have any and why?

Thanks, Adam. Yes, as we talk about investing in ourselves, we have recognized that there are a lot of opportunities to mine. And in your words, more profitability, but equally important is there's opportunities to mine growth. And so we think that if you were to provide us that uses of cash, your best use is if you can grow with what you've got top and bottom line, that's a wise use. But acquisitions are extremely important to us. They will be going forward. We are in the market at all times looking at what opportunities may lay. And so I can simply say that you'll be hearing from us on both sides. You'll be hearing that -- acquisitions will not stop us from continuing to do what we think are the right things as it relates to capital investments going into our base as we broaden the portfolio or strengthen the base through acquisitions. So TBD, you guys will be the first to know when we pull the trigger.

Your final question is from the line of Mark Wilde with Bank of Montreal.

Yes, just 2 quick ones. Howard, can you just put a little more color on what you think has tightened the URB business up? I mean, I'm hearing the one thing that might be coming into play is some URB mills actually running some containerboard where possible?

I have not heard that. Rodger, do you -- have you?

Maybe just on the margin, on the fringes, Mark. It was tight. Really what tightened it up is coming out of pandemic, everyone came into the reopening with very low inventories. I think you tack on top of that the storm impacts, the demand for tissue and towel due to the pandemic, just very low inventories across the system. So yes, there may be on fringes some of the mills running other products on potentially URB mills, but mostly it's just demand from the recovery.

Yes. And I'll also add. We didn't note this, but in our first quarter, while we had the outages related to the storm, we had 2 really significant shutdowns. The entire Hartsville complex was down for close to a week with planned downtime that we had pushed and pushed and pushed. And even as tight as we were, there was just no way that we could pass on the shutdown. So some of it self-inflicted as well, at least in terms of our position and our performance for the quarter, but we had to complete those downtimes.

Okay. And then Howard, just the other one. Just a quick update on your efforts to reengineer the composite can. I think a lot of this has been going on over in Europe. But also maybe with that, just how important is that reengineering of the can in terms of the structures to the customers around the world? Or is it just Europe?

I think Europe is where it really is. Here in North America, I think it's another way to talk about sustainability and our package. We've been collected and recycled through the steel stream for a long, long time, and that continues today. So recent data I saw that maybe 90% of our cans were captured in our MRFs and other MRFs. So it's more of a perception issue, I think, is what you're seeing in Europe. We're recycled within the carton stream there. But it's -- what we're seeing is just right or wrong, a perception around plastics and our customers or our future customers are coming to us saying, look, we'd like to get out of this format that we're in from a perception perspective. Maybe it is or is not recyclable, but the customers perceive it as a -- our package as a paper as a more friendly alternative. So it's really Europe where we're seeing the benefit and where we're focusing most of our attention.

Ladies and gentlemen -- and I'm showing no further questions at this time. I would now like to turn the conference back to Roger for closing remarks.

Okay. Thank you, again, Angela. And again, let me thank everyone for joining us today. We certainly appreciate your interest in the company. And as always, if you have further questions, please don't hesitate to contact us. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day. You may all disconnect.